James:
Many things have changed the world over the course of history, but impact on our lifestyles and profitability as a business are two different things. I simply cannot buy this concept of a new era in which valuations do not matter in a cyclical industry. Obviously, people who believe that valuations are irrelevant have been richly rewarded over the past couple of years, especially in internet stocks, and I expect some businesses that have a decent chance at protecting there market share to justify at least a reasonable portion of their lofty valuations.
Look at what has happened in the I-broker sector over the past couple of years, though. There has been an explosion of new businesses set up to take advantage of the growth and they have had to do their best to differentiate from each other by either offering lower prices than their neighbors or premium service in some way or other, resulting in thin margins. That is probably why MER was resistant to joining the party, and SIEB is in the same boat of losing revenues from their discount brokerage services due to defections to the web.
Lastly, these stocks are selling at huge multiples to their sales in the midst of a stock mania in which day-trading is in vogue. I am old-school enough to believe that bear markets have not been abolished, and when the next bear market hits, the same thing will happen that has happened in every previous bear market. People will no longer view stocks as the only possible place to park their money and trading volumes will shrink, resulting in a squeeze on all brokers' profits, which is why brokers have traditional not been values at high p/e ratios. Obviously this is all relatively long-term stuff and by no means precludes SIEB from going to 100 next week, but a reality check never hurts.
Happy Trading |
